UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2012
OR
¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            

 

Commission File No.:  000-54661

 

EMPOWERED PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 

Nevada		27-0579647
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

 

3367 West Oquendo Road, Las Vegas, Nevada 89118 

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

 

800-929-0407

 (COMPANY’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

_______________________________________________

Former Name

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ¨     No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  ¨	Smaller reporting company   x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x 

 

The registrant had 62,388,856 shares of common stock, par value $0.001 per share, outstanding as of August 14, 2012.

 

 

EMPOWERED PRODUCTS, INC. AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period Ended June 30, 2012

INDEX

 

						Page
Part I		Financial Information
		Item 1		Financial Statements
				(a)	Consolidated Condensed Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011	2
				(b)	Consolidated Condensed Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)	3
				(c)	Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)	4
				(d)	Notes to Consolidated Condensed Financial Statements as of and for the Six Months ended June 30, 2012 (Unaudited)	5
		Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
		Item 3		Quantitative and Qualitative Disclosures About Market Risk		16
		Item 4		Controls and Procedures		16
Part II		Other Information
		Item 1		Legal Proceedings		16
		Item 1A		Risk Factors		16
		Item 2		Unregistered Sale of Equity Securities and Use of Proceeds		16
		Item 3		Default Upon Senior Securities		16
		Item 4		Mine Safety Disclosures.		16
		Item 5		Other Information		16
		Item 6.		Exhibits		17
Signatures						18

  

 

Empowered Products, Inc. and Subsidiaries

Consolidated Condensed Balance Sheets

 

		June 30,				December 31,
		2012				2011
		(Unaudited)
Assets
Current Assets:
Cash and cash equivalents		$	246,598			$	863,766
Restricted cash			561,411				561,411
Accounts receivable, less allowance for doubtful accounts of $12,743 in 2012 and $49,000 in 2011			318,176				346,332
Inventory			1,035,637				767,755
Prepaid and other current assets			117,699				161,344
Total current assets			2,279,521				2,700,608
Plant and equipment, net			262,880				287,793
Trademarks and other intangibles, net			521,532				518,475
Other assets			2,282				5,660
Total assets		$	3,066,215			$	3,512,536
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit		$	459,782			$	468,521
Accounts payable and other accrued expenses			241,677				426,240
Total current liabilities			701,459				894,761
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued and outstanding			-				-
Common stock, $.001 par value, 2,200,000,000 shares authorized, 62,388,856 shares issued and outstanding			62,389				62,389
Additional paid-in capital			6,089,899				6,089,899
Accumulated deficit			(3,787,532	)			(3,534,513	)
Total stockholders' equity			2,364,756				2,617,775
Total liabilities and stockholders' equity		$	3,066,215			$	3,512,536

 

See Notes to Unaudited Consolidated Condensed Financial Statements.

 

 

Empowered Products, Inc. and Subsidiaries

Consolidated Condensed Statements of Operations

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Revenue		$	685,408			$	661,942			$	1,501,321			$	1,412,038
Cost of revenue			408,770				322,617				693,956				837,181
Gross profit			276,638				339,325				807,365				574,857
Selling and distribution			252,679				111,077				529,918				237,998
General and administrative			279,970				337,631				519,146				554,275
Loss from operations			(256,011	)			(109,383	)			(241,699	)			(217,416	)
Interest income			-				-				-				500
Interest expense			(5,603	)			(10,254	)			(11,320	)			(14,101	)
Net Loss		$	(261,614	)		$	(119,637	)		$	(253,019	)		$	(231,017	)
Earnings (loss) per share:
Basic		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Diluted		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Weighted average common shares outstanding  for basic and diluted			62,388,856				243,758,856				62,388,856				243,758,856

 

See Notes to Unaudited Consolidated Condensed Financial Statements.

 

 

Empowered Products, Inc. and Subsidiaries

Consolidated Condensed Statements of Cash Flows

(Unaudited)

 

		Six Months Ended
		June 30,
		2012				2011
Cash flows used in operating activities:
Net loss		$	(253,019	)		$	(231,017	)
Adjustments to reconcile net loss to cash flows used in operating activities:
Depreciation and amortization			34,461				26,675
Changes in assets and liabilities:
(Increase) in restricted cash			-				(500	)
Decrease (increase) in accounts receivable			28,156				(20,485	)
Increase in inventory			(267,882	)			(53,907	)
Decrease (increase) in prepaid and other current assets			43,645				(5,403	)
Decrease (increase) in other assets			3,378				(556	)
(Decrease) increase in accounts payable and other accrued expenses			(184,563	)			169,324
Cash flows used in operating activities			(595,824	)			(115,869	)
Cash flows used in investing activities:
Purchase of plant and equipment			(8,198	)			(3,874	)
Payment of fees for trademarks			(4,407	)			(31,797	)
Cash flows used in investing activities			(12,605	)			(35,671	)
Cash flows (used in) provided by financing activities:
Note payable proceeds			-				500,000
Capital contributions			-				52,736
Line of credit (repayments) draws, net			(8,739	)			2,274
Cash flows (used in) provided by financing activities			(8,739	)			555,010
Net (decrease) increase in cash and cash equivalents			(617,168	)			403,470
Cash and cash equivalents at the beginning of the period			863,766				28,943
Cash and cash equivalents at the end of the period		$	246,598			$	432,413
Supplementary disclosure of cash flow information:
Cash paid for interest		$	11,320			$	9,934
Supplementary disclosure of noncash investing and financing activities:
Acquisition of a business through settlement of an accounts receivable balance		$	-			$	58,564

 

See Notes to Unaudited Consolidated Condensed Financial Statements.

  

 

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

 

Note 1.  Nature of Operations

 

Empowered Products, Inc. and Subsidiaries (“the Company”) is engaged in the manufacture, sale and distribution of personal care products, principally throughout the United States, Europe and Asia. All of its business has been categorized as one segment.

 

Note 2.  Recapitalization and Merger

 

On June 30, 2011, the Company completed a reverse merger transaction, pursuant to an Agreement and Plan of Merger, dated June 30, 2011 (the “Merger Agreement”), by and among the Company, EPI Acquisition Corp. (“Acquisition Sub”), EPI Name Change Corp. (“Name Change Merger Sub”), and Empowered Products Nevada, Inc. (“EP Nevada”) pursuant to which EP Nevada merged with and into Acquisition Sub with EP Nevada continuing as the surviving entity (the “Merger”). In contemplation of the Merger, the Company effectuated a 44-to-1 forward stock split whereby each share of its issued and outstanding common stock was converted into forty-four shares of common stock. In connection with this stock split, the Company’s board of directors approved an increase in the total authorized shares of common stock of the Company from 50,000,000 to 2,200,000,000. The weighted average number of shares outstanding at March 31, 2011 have been retroactively adjusted to reflect the 44-to-1 forward stock split. Upon the closing of the Merger, the Company changed its name from “On Time Filings, Inc.” to “Empowered Products, Inc.” Upon consummation of the Merger, each outstanding share of EP Nevada common stock was exchanged for 4 shares of the Company’s common stock. As a result of the Merger, the sole stockholder of EP Nevada common stock received 40,000,000 shares of the Company’s common stock. Immediately after the closing of the Merger, the Private Placement (see Note 8) and the Share Cancellation the Company had 62,388,856 shares of common stock issued and outstanding, no issued shares of preferred stock, no options and warrants to purchase 2,000,000 shares of common stock issued and outstanding.

 

In addition, in accordance with the terms of the Merger, upon the effective time of the Merger, members of the board of directors and officers of EP Nevada became directors and officers of the Company. The business of EDGARizing corporate documents was abandoned and the business plan of the EP Nevada was adopted. The transaction was therefore recorded as a reverse acquisition with EP Nevada as the acquiring party and the Company as the acquired party for accounting purposes.

 

Pursuant to a Share Repurchase and Cancellation Agreement dated June 30, 2011 (the “Repurchase Agreement”) by and between the Company, OT Filings Inc., a wholly owned subsidiary of the Company (“OT Filings”) and Suzanne Fischer, the Company repurchased 223,370,000 shares of its common stock (the “Repurchased Shares”) from Suzanne Fischer for a repurchase price of $50,000 and all of the issued and outstanding shares of OT Filings. Upon the repurchase, all of the Repurchased Shares were cancelled and the repurchase price of $5,000 was recorded as expense in the period. The remaining $45,000 was paid out of OT Filings cash on-hand prior to the transfer of operating assets and liabilities of the pre-merged OT Filings to Suzanne Fischer.

 

Note 3.  Basis of Presentation and Accounting Policies

 

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the instructions from Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and notes normally provided in the audited financial statements and should be read in conjunction with the Company’s audited financial statements for fiscal year ended December 31, 2011 filed with the United States Securities and Exchange Commission on April 16, 2012. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

 

The accompanying unaudited consolidated condensed balance sheets, statements of operations and cash flows reflect all adjustments, consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position of the Company at June 30, 2012 and the results of operations and cash flows for the three and six months ended June 30, 2012 and 2011.

 

Consolidation

 

The consolidated condensed financial statements include the accounts of Empowered Products, Inc. and its direct and indirect wholly-owned subsidiaries, Empowered Products Nevada, Inc., Empowered Products Limited, Empowered Products Asia Limited, and Empowered Products Pty Ltd. All material intercompany balances have been eliminated in consolidation.

 

 

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

 

Revenue recognition

 

Revenue is recognized when all significant contractual obligations, which involve the shipment of the products sold and reasonable assurance as to the collectability of the resulting account receivable have been satisfied. Returns are permitted primarily due to damaged or unsalable items. Revenue is shown after deductions for prompt payment, volume discounts and returns. The Company participates in various promotional activities in conjunction with its retailers and distributors, primarily through the use of discounts. These costs have been subtracted from revenue and for the six months ended June 30, 2012 and 2011 approximated $18,000 and $39,000, respectively. The allowances for sales returns are established based on the Company’s estimate of the amounts necessary to settle future and existing obligations for such items on products sold as of the balance sheet date.

 

Sales tax

 

Sales tax collected from customers and remitted to various government agencies is on a net basis (excluded from revenues) in the statement of operations.

 

Cost of revenue

 

Cost of revenue includes the cost of raw materials, packaging, inbound freight, direct labor, manufacturing facility costs, and depreciation. Other overhead costs, including purchasing, receiving, quality control, and warehousing are classified as selling and distribution or general and administrative expenses.

 

At times the Company provides free products to its customers. These free products are accounted for in accordance with Accounting Standards Codification (“ASC”) 605-50 Revenue Recognition-Customer Payments and Incentives and the cost of the product is recognized in cost of revenue.

 

Shipping and delivery costs

 

Expenses for shipping and delivery of products sold to customers are billed to and collected from customers. These expenses are recognized in the period in which they occur and are classified as gross revenues if billed to the customer and cost of revenue if incurred by the Company.

 

Research and development

 

Research and development expenditures are charged to expense as incurred.

 

Advertising

 

Advertising costs are expensed as incurred. For the six months ended June 30, 2012 and 2011, the Company incurred approximately $159,000 and $25,000, respectively, in advertising and company marketing expenses.

 

Depreciation

 

Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated useful lives on the straight-line method.

 

Income taxes

 

The Company utilizes the asset and liability method of accounting for income taxes pursuant to ASC 740, Accounting for Income Taxes (“ASC 740”). ACS 740 requires the recognition of deferred tax assets and liabilities for both the expected future tax impact of differences between the financial statement and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. The Company has evaluated the net deferred tax asset, taking into consideration operating results, and determined that a full valuation allowance should be maintained.

 

 

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

 

Uncertain tax positions

 

The Company accounts for uncertain tax positions in accordance with Financial Accounting Standards Board (“FASB”) ASC 740 (formerly Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109). FASB ASC 740 prescribes a recognition threshold and measurement process for financial statement recognition of uncertain tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on recognition, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has determined that there are no uncertain tax positions, and therefore no interest or penalties related to uncertain tax positions, to recognize at June 30, 2012 or December 31, 2011.

 

Use of estimates

 

Management uses estimates and assumptions in preparing these financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities and the reported revenues and expenses. Such estimates primarily relate to the collectability of accounts receivable, provision for sales returns and allowances, inventory obsolescence, useful life of plant and equipment and the valuation of warrants. Actual results could vary from the estimates that were used.

 

Fair value of financial instruments

 

The Company’s financial instruments are cash and cash equivalents, restricted cash, accounts receivable, line of credit, and accounts payable. The recorded values of cash and cash equivalents, restricted cash, accounts receivable, line of credit and accounts payable approximate their fair values based on their short-term nature.

 

Cash and cash equivalents

 

For the purpose of reporting cash flows, the Company has defined cash equivalents as those highly liquid investments purchased with an original maturity of six months or less.

 

Restricted cash

 

Included in restricted cash is a certificate of deposit securing the Company’s line of credit.

 

Accounts receivable

 

Accounts receivable are carried at the outstanding amount due less an allowance for doubtful accounts, if an allowance is deemed necessary. Allowance for doubtful accounts are established when there is a basis to doubt the full collectability of the accounts receivable. On a periodic basis, the Company evaluates its accounts receivable and determines the requirement for an allowance, based on its history of past write-offs, collections and current conditions. When an account receivable is ultimately determined to be uncollectible and due diligence for collection has taken place, the account receivable is written-off.

 

Inventory

 

Inventory consists primarily of raw materials and finished goods that the Company holds for sale in the ordinary course of business. Inventory is stated at the lower of cost (determined on the first-in, first-out basis) or market. Other manufacturing overhead costs are also allocated to finished goods inventory. The amount of these allocations to inventory was approximately $74,000 and $87,000 at June 30, 2012 and December 31, 2011, respectively.

 

Trademarks and other intangibles, net

 

The Company capitalizes fees in connection with the development of various product trademarks. These assets are considered indefinite lived intangible assets and are reviewed for impairment annually or when circumstances indicate that the carrying amount of the trademark may not be fully recoverable. The amount attributable to trademarks at June 30, 2012 and December 31, 2011 was approximately $511,000 and $507,000, respectively. An impairment loss would be recorded if the carrying amount of the indefinite lived intangible asset exceeds its estimated fair value. At June 30, 2012 and December 31, 2011, other intangibles, in the amount of approximately $10,000 and $11,000, respectively, consist of a customer list which is being amortized on the straight-line basis over the next four years.

 

 

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

 

Long-lived assets

 

The Company follows accounting standards concerning accounting for the impairment or disposal of long-lived assets in adjusting the book value of plant and equipment. These accounting standards establish a single accounting model for long-lived assets to be disposed of by sale which includes measuring a long-lived asset classified as held for sale at the lower of its carrying amount or its fair value less costs to sell. For assets to be held and used, these accounting standards require the recognition of an impairment loss whenever events or changes in circumstances have indicated that an asset may be impaired and the future cash flows from that asset are less than the asset’s carrying amount. If the fair value less costs to sell is less than the carrying amount of the asset, an impairment loss must be recognized to write down the asset to its estimated fair value. At June 30, 2012 and 2011, no impairment losses were recorded.

 

Note 4. Earnings per Share (“EPS”)

 

Earnings (loss) per share are calculated in accordance with the authoritative guidance issued by the FASB on earnings per share.  Basic net earnings (loss) per share are based upon the weighted average number of common shares outstanding, but excluding shares issued as compensation that have not yet vested. Diluted net earnings (loss) per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised, and that all unvested shares have vested.  Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

 

The following table illustrates the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.

 

		Six Months Ended June 30,
		2012				2011
Net loss available to common shares		$	(253,019	)		$	(231,017	)
Basic:
Weighted average shares			62,388,856				243,758,856
Diluted:
Weighted average shares, basic			62,388,856				243,758,856
Dilutive effect of warrants			-				-
Weighted average shares, diluted			62,388,856				243,758,856
Basic earnings per share		$	(0.00	)		$	(0.00	)
Diluted earnings per share		$	(0.00	)		$	(0.00	)
Weighted average anti-dilutive shares excluded from diluted EPS			2,000,000				-

 

Note 5.  Inventory

 

Inventory consists of the following at:

 

		June 30,				December 31,
		2012				2011
Raw materials		$	700,688			$	418,576
Finished goods			334,949				349,179
		$	1,035,637			$	767,755

 

 

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

 

Note 6.  Plant and Equipment, net

 

Depreciation for the six months ended June 30, 2012 and 2011 was approximately $33,000 and $26,000, respectively. Cost, accumulated depreciation and estimated useful lives are as follows:

 

			Estimated			June 30,				December 31,
Category			Useful Lives			2012				2011
Manufacturing and computer equipment			5 - 7 Years			$	381,618			$	376,218
Office furniture and computer software			3 - 7 Years				78,490				75,692
Vehicles			5 Years				19,442				19,442
							479,550				471,352
Less: accumulated depreciation							(216,670	)			(183,559	)
						$	262,880			$	287,793

 

Note 7.  Line of Credit

 

The Company has a $500,000 line of credit with a financial institution bearing interest at prime plus 1% (prime was 3.25% at June 30, 2012) and an interest rate floor of 5%, secured by restricted cash and a personal guarantee of the Company’s majority stockholder with a maturity date of November 1, 2012. The balance was $459,782 and $468,521 at June 30, 2012 and December 31, 2011, respectively.

 

Note 8. Stockholders’ Equity

 

On June 30, 2011, the Company entered into a subscription agreement with New Kaiser Limited (the “Investor”) to sell an aggregate of 2,000,000 shares of common stock for $1.00 per share. In connection with the shares being issued, the Investor received five-year warrants which allow the Investor to purchase 2,000,000 shares of its common stock at an exercise price of $1.25 per share. The warrants were deemed to have a fair value of approximately $885,000 and are included in additional paid-in capital.

 

Note 9. Revenue by Geographic Area

 

Revenues by geographic area are determined based on the location of the Company’s customers. The following provides financial information concerning the Company’s operations by geographic area for the three and six months ended June 30:

 

		Three Months Ended																Six Months Ended
		June 30,																June 30,
		2012								2011								2012								2011
Revenue:
United States		$	595,766				86.9	%		$	596,658				90.1	%		$	1,353,992				90.2	%		$	1,285,795				91.0	%
Europe			48,371				7.1	%			46,286				7.0	%			85,934				5.7	%			94,203				6.7	%
Asia			41,271				6.0	%			18,998				2.9	%			61,395				4.1	%			32,040				2.3	%
		$	685,408				100.0	%		$	661,942				100.0	%		$	1,501,321				100.0	%		$	1,412,038				100.0	%

 

Note 10. Related Party Transactions and Operating Leases

 

The Company rents office space from an affiliate, EGA Research, LLC, that is controlled by the Company’s majority stockholder under a triple net lease expiring on February 28, 2014. The lease calls for monthly rental payments of $7,000. Total rent expense for each of the six months ended June 30, 2012 and 2011 was $42,000.

 

The Company entered into an office lease with an unrelated party for additional rental space in 2011 expiring on May 31, 2013. The lease calls for monthly rental payments of $4,000. The Company has an option to purchase the building for fair value.

 

The Company also leases office equipment under a non-cancelable operating lease agreement that provides for monthly rental payments of $270 through February 2013.

 

Included in selling and distribution expenses for six months ended June 30, 2012 and 2011 are marketing fees of approximately $136,000 and $0, respectively, paid to a company owned by the Company’s majority stockholder.

 

 

Empowered Products, Inc. and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

 

Note 11. Income Taxes

 

Income taxes are calculated using the asset and liability method of accounting. Deferred income taxes are computed by multiplying statutory rates applicable to estimated future year differences between the financial statement and tax basis carrying amounts of assets and liabilities.

 

The Company has federal net operating loss (“NOL”) carry forwards and other temporary differences which result in a deferred tax asset of approximately $1,308,000 at June 30, 2012 and $1,220,000 at December 31, 2011. A 35% statutory federal income tax rate was used for the calculation of the deferred tax asset. Management has established a valuation allowance equal to the estimated deferred tax asset due to uncertainties related to the ability to realize these tax assets. The valuation allowance increased by approximately $88,000 during the six months ended June 30, 2012.

 

The NOL carry forwards may be significantly limited under Section 382 of the Internal Revenue Code (IRC). NOL’s are limited under Section 382 when there is a significant “ownership change” as defined in the IRC. The availability of these carry forwards may expire as a result of the Company’s merger on June 30, 2011.

 

The limitation imposed by Section 382 would place an annual limitation on the amount of the NOL carry forwards that can be utilized. If the necessary studies were completed, the amount of the NOL carry forwards available may be reduced significantly. However, since the valuation allowance fully reserves for all available carry forwards, the effect of the reduction would be offset by a reduction in the valuation allowance. Thus, the resolution of this matter would have no effect on the reported assets, liabilities, revenues, and expenses for the periods presented.

 

Note 12. Stock Option Plan 

 

On April 19, 2012, the Company’s Board of Directors and stockholders approved the 2012 Omnibus Incentive Plan (the “Plan”) reserving 5,000,000 common shares for issuance under the Plan. Awards under the Plan may be in the form of a stock option, a restricted stock award, a restricted stock unit award, a performance award, a dividend equivalent award, a deferred stock award, a stock payment award, a stock appreciation right and other incentive award or a performance share award. The exercise price per share subject to each stock option granted cannot be less than 100% of the fair market value of a share on the date of the stock option grant. In addition, in the case of incentive stock options granted to a greater than 10% stockholder, such exercise price shall not be less than 110% of the fair market value of a share on the date of the option grant.

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion relates to a discussion of the financial condition and results of operations of Empowered Products, Inc., a Nevada corporation (the “Company”) herein used in this report, unless otherwise indicated, under the terms “we,” “our,” “Company” and “EPI,” and its wholly-owned subsidiary Empowered Products Nevada, Inc., a Nevada corporation (“EP Nevada”), EP Nevada’s wholly-owned subsidiary, Empowered Products Limited, a British Virgin Islands company (“EP BVI”), EP BVI’s wholly-owned subsidiaries, Empowered Products Asia Limited, a Hong Kong company (“EP Asia”) and Empowered Products Pty Ltd. (formerly Polarin Pty Ltd), an Australian company (“EP Australia”).

 

Forward-Looking Statements

 

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated condensed financial statements and the related notes that are included in this Quarterly Report and the audited consolidated financial statements for the years ended December 31, 2011 and 2010 and the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on April 16, 2012 (the “Annual Report”).

 

The information contained in this report includes some statements that are not purely historical and that are forward-looking statements.  Such forward-looking statements include, but are not limited to, statements regarding our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, and results of operations.  In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.  The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. The forward-looking statements contained in this report are based on current expectations and beliefs concerning future developments and the potential effects on the parties and the transaction.  There can be no assurance that future developments actually affecting us will be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the parties’ control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements, including the following:

 

·

our reliance on third-party contractors to mix our products and manufacture our nutritional supplements;

 

·

our ability to grow and increase awareness of our brand;

 

·

the success of our new sales strategy to sell products directly to retail consumers;

 

·

our ability to control and reduce advertising and marketing costs;

 

·

our ability to obtain a minimum favorable Nielsen Rating;

 

·

the maintenance of favorable trade relations between China and the U.S.;

 

·

our ability to sell our products in South America and other new international markets;

 

·

our ability to develop a new online marketing strategy for our products;

 

·

our ability to obtain certification in individual countries in the European Union;

 

·

the occurrence of foul weather that disrupts our operations;

 

·

our ability to market our products to end-retailers successfully;

 

·

our vulnerability to interruptions in shipping lanes;

 

·

our ability to increase our production space, machinery and personnel in line with our expansion plans;

 

·

our ability to increase our production capacity in a timely manner;

 

·

the willingness of third-parties to conduct business with us given the adult nature of our business;

 

·

our ability to protect our trademarks;

 

 

·

market acceptance of our new line of nutritional supplements;

 

·

the anticipated future growth in the market for nutritional supplements;

 

·

our inexperience in the nutritional supplement market;

 

·

our inexperience in dealing with the U.S. Food and Drug Administration and other regulatory agencies;

 

·

our reliance on the expected growth in demand for our products;

 

·

our ability to comply with regulations regarding the labeling of our products;

 

·

exposure to product liability claims;

 

·

exposure to intellectual property claims from third parties;

 

·

development of a public trading market for our securities;

 

·

our ability to raise additional capital;

 

·

the cost of complying with current and future governmental regulations and the impact of any changes in the regulations on our operations;

 

·

and various other matters, many of which are beyond our control.

 

Company Overview

 

We were incorporated in the State of Nevada on July 10, 2009. On June 30, 2011, pursuant to an Agreement and Plan of Merger, EP Nevada merged with and into EPI Acquisition Corp., a wholly-owned subsidiary of the Company, with EP Nevada as the surviving company (the “Merger”). Upon the closing of the Merger, we (i) assumed the business and operations of EP Nevada and its subsidiaries, which is now our sole business operations, and (ii) changed our name from “On Time Filings, Inc.” to “Empowered Products, Inc.”

 

Prior to the Merger, described below, our business included the EDGARization of corporate documents that require filing on EDGAR, the Electronic Data Gathering, Analysis and Retrieval system maintained by the Securities and Exchange Commission (“SEC”), and providing financial reporting and bookkeeping services. Pursuant to an assignment agreement, the assets and liabilities of this business were transferred to OT Filings, Inc. immediately after the Merger and the shares of OT Filings were transferred to Suzanne Fischer, one of our directors.

 

EP Nevada was incorporated in the State of Nevada on April 22, 2004.  In March 2011, EP Nevada formed EP Asia to acquire certain assets of Polarin Limited, a company organized under the laws of Hong Kong (“Polarin”).  Upon acquiring the assets of Polarin on March 31, 2011, EP Nevada acquired a new indirect subsidiary, Empowered Products Pty Ltd. , an Australian company (“EP Australia”).

 

Through EP Nevada and its subsidiaries, we offer a line of topical gels, lotions and oils, designed to enhance a person’s sex life and make people feel good about their sexual health in general.  We currently have 12 exclusively formulated skin lubricants sold under our PINK® for Women and GUN OIL® for Men trademarks and intend to continue to expand our products offerings.  Our proprietary formulated products are designed to increase mental focus and to improve the bond of interpersonal relationships. Our trademarked products are currently sold in 30 countries through more than 2,700 retail outlets.

 

In the third quarter of 2011, Empowered Products entered into the health supplement market with the introduction of four nutritional supplements under the “Elevate for Women” and “High Caliber for Men” brands. We intend to expand our proprietary line of supplements by targeting the growing number of people who we believe are socially incapacitated and/or subdued by prescription anti-depressants.

 

 

Results of Operations

 

The following table sets forth information from our statements of operations for the three months ended June 30, 2012 and 2011 in dollars and as a percentage of revenue (unaudited):

 

		Three Months Ended June 30,																Six Months Ended June 30,
		2012								2011								2012								2011
		In Dollars				Percentage of Revenue				In Dollars				Percentage of Revenue				In Dollars				Percentage of Revenue				In Dollars				Percentage of Revenue
Revenues		$	685,408				100	%		$	661,942				100	%		$	1,501,321				100	%		$	1,412,038				100	%
Cost of revenue			408,770				59.64	%			322,617				48.74	%			693,956				46.22	%			837,181				59.29	%
Gross profit			276,638				40.36	%			339,325				51.26	%			807,365				53.78	%			574,857				40.71	%
Selling and distribution			252,679				36.87	%			111,077				16.78	%			529,918				35.30	%			237,998				16.85	%
General and administrative			279,970				40.85	%			337,631				51.01	%			519,146				34.58	%			554,275				39.25	%
Loss from operations			(256,011	)			(37.35	)%			(109,383	)			(16.52	)%			(241,699	)			(16.10	)%			(217,416	)			(15.40	)%
Interest income			-				-				-				-				-				-				500				0.04	%
Interest expense			(5,603	)			(0.82	)%			(10,254	)			(1.55	)%			(11,320	)			(0.75	)%			(14,101	)			(1.00	)%
Net loss		$	(261,614	)			(38.17	)%		$	(119,637	)			(18.07	)%		$	(253,019	)			(16.85	)%		$	(231,017	)			(16.36	)%
Net loss per share		$	(0.00	)						$	(0.00	)						$	(0.00	)						$	(0.00	)

 

Three Months Ended June 30, 2012 and 2011

 

Revenues for the three months ended June 30, 2012 were approximately $685,000 as compared to approximately $662,000 in the comparable period in 2011. The 3.5% increase in revenue was primarily due to price increases implemented on January 1, 2012. Herbal supplement sales for the period ended June 30, 2012 were approximately $14,000 compared to $0 for the period ended June 30, 2011.

 

Cost of revenue primarily consists of costs related to the production or purchase of products for sale.  Cost of revenue for the three months ended June 30, 2012 was approximately $409,000 as compared to approximately $323,000 in the comparable period in 2011. The increase in cost of revenues was primarily the result of production costs associated with idle production capacity which resulted in a greater allocation of overhead to expense as opposed to capitalizing these costs to inventory.

 

For the three months ended June 30, 2012, our gross profit decreased to approximately $277,000, from approximately $339,000 for the three months ended June 30, 2011. During the same period, our gross profit margin decreased to 40.4%, down from 51.3% in the three months ended June 30, 2011.  This decrease in our gross profit margin was mainly due to an increase in costs goods produced due to idle production capacity which resulted in a greater allocation of overhead to expense as opposed to capitalizing these costs to inventory.

 

Selling and distribution expenses for the three months ended June 30, 2012 were approximately $253,000, or approximately 36.9% of revenues, compared to approximately $111,000, or 16.8% of revenues, for the same period in the prior year, an increase of 127.5%.  The increase in selling and distribution expenses was primarily the result of direct mail marketing campaigns and the continued development of our online retail store.

 

General and administrative expenses for the three months ended June 30, 2012 were approximately $280,000, or 40.9% of revenue, compared to approximately $338,000, or 51.0% of revenues, for the same period in the prior year, a 17.0% decrease.  The decrease in general and administrative expenses was primarily because of decreased professional fees that were previously associated with becoming a public company as a result of the Merger during the three months ended June 30, 2011.

 

No expense or benefit from income taxes was recorded in the three months ended June 30, 2012 or 2011 due to our net losses.  We do not expect any U.S. federal income taxes to be incurred for the current fiscal year because of available net operating loss carry forwards.

 

We had a net loss of approximately $262,000 for the three months ended June 30, 2012 compared to a net loss of approximately $120,000 for the three months ended June 30, 2011.

 

 

Six Months Ended June 30, 2012 and 2011

 

Revenues for the six months ended June 30, 2012 were $1.5 million as compared to $1.4 million in the comparable period in 2011.  The 6.3% increase in revenue was primarily caused by the implementation of price increases on January 1, 2012.

 

Cost of revenue primarily consists of costs related to the production or purchase of products for sale.  Cost of revenue for the six months ended June 30, 2012 was approximately $694,000 compared to approximately $837,000 in the comparable period in 2011.  The decrease in cost of revenues was primarily the result of a lower volume of products being sold with new higher margins which substantially decreased our costs which was partially offset by higher costs in the second quarter of 2012 due to higher costs associated with idle production capacity which resulted in a greater allocation of overhead to expense as opposed to capitalizing these costs to inventory.

 

For the six months ended June 30, 2012, our gross profit increased to approximately $807,000, from approximately $575,000 for the six months ended June 30, 2011. During the same period, our gross profit margin increased to 53.8%, up from 40.7% in the six months ended June 30, 2011.  This increase in our gross profit margin was mainly due to improved purchasing and procurement practices, as well as price increases on our finished products that were implemented on January 1, 2012.

 

Selling and distribution expenses for the six months ended June 30, 2012 were approximately $530,000, or 35.3% of revenues, compared to  approximately $238,000, or 16.9% of revenues, for the same period in the prior year, an increase of 122.6%. The increase in selling and distribution expenses was primarily the result of direct mail marketing campaigns and the continued development of our online retail store.

 

General and administrative expenses for the six months ended June 30, 2012 were approximately $519,000 or 34.6% of revenues, compared to approximately $554,000, or 39.3% of revenues, for the same period in the prior year, a 6.3% decrease.  The decrease in general and administrative expenses was primarily because of decreased professional fees that were associated with becoming a public company as a result of the Merger during the six months ended June 30, 2011.

 

No expense or benefit from income taxes was recorded in the six months ended June 30, 2012 or 2011 due to our net losses.  We do not expect any U.S. federal or state income taxes to be recorded for the current fiscal year because of available net operating loss carryforwards.

 

We had a net loss of approximately $253,000 for the six months ended June 30, 2012 compared with a net loss of approximately $231,000 for the six months ended June 30, 2011.

 

Liquidity and Capital Resources

 

We had unrestricted cash and cash equivalents of approximately $247,000 as of June 30, 2012, as compared to $864,000 as of December 31, 2011.

 

We generally finance our activities through our business operations, with any shortfalls supplemented by our borrowings under a line of credit, contributions from our majority stockholder, or sales of equity securities.   We have a line of credit with Wells Fargo Bank providing for borrowings of up to $500,000.  As of June 30, 2012, we had borrowings of $459,782 outstanding under this line of credit. This line of credit is secured by our restricted cash balance which amounted to $561,411 at June 30, 2012.

 

For the six months ended June 30, 2012, net cash used in operating activities was approximately $596,000, as compared to net cash used in operating activities of approximately $116,000 for the comparable period in 2011. The increase in net cash used in operating activities is primarily attributable an increase in our raw materials inventory in anticipation of sales to large drug store chains and paydowns of our accounts payable and accrued expense balances.

 

For the six months ended June 30, 2012, net cash used in investing activities was approximately $13,000, as compared to net cash used in investing activities of approximately $36,000 for the comparable period in 2011. The decrease in net cash used in investing activities is primarily attributable to the decrease in payments of fees for trademarks from 2011 levels.

 

Net cash used in financing activities was approximately $9,000 for the six months ended June 30, 2012 as compared to net cash provided by financing activities of approximately $555,000 for the comparable period in 2011. The increase in cash used in financing activities was due to our pay downs of the line of credit.

 

  

For the six months ended June 30, 2012 and 2011, our inventory was valued at approximately $1.0 million and $0.5 million respectively. This buildup of inventory was primarily due to an increase of raw material purchases in anticipation of increased sales to national drugstore chains. On February 1, 2012, we commenced product shipments to select Walgreens retail stores through an initial order placed by its national purchasing office in Deerfield, Illinois. We are currently expanding our pursuit of a national and regional drugstore chain presence.

 

Anticipated cash flows from operations and funds available from our credit facilities, together with cash on hand, will provide sufficient liquidity to meet our working capital needs and planned capital expenditures. Changes in our operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may require us to seek additional debt or equity financing. There can be no guarantee that financing will be available on acceptable terms or at all. Debt financing, if available, could impose additional cash payment obligations and additional covenants and operating restrictions.

 

Off-Balance-Sheet Arrangements

 

In August 2011, the Company entered into an agreement to purchase product sample packets of Gun Oil and PINK products. In connection with the agreement, the vendor provides the manufacturing equipment, machine operator, and management of production. The Company is required to make minimum monthly purchases of $5,880 pursuant to the agreement. Since the execution of the agreement, the Company made purchases of approximately $64,600 pursuant to the purchase obligation.

 

Critical Accounting Policies

 

Management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.

 

While our significant accounting policies are more fully described in Note 3 to our audited financial statements included in the Annual Report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.

 

Revenue recognition

 

We recognize revenue when all significant contractual obligations, which involve the shipment of the products sold and reasonable assurance as to the collectability of the resulting account receivable, have been satisfied. Returns are permitted for damaged or unsalable items only.  Revenue is shown after deductions for prompt payment, volume discounts and returns.  We participate in various promotional activities in conjunction with our retailers and wholesalers, primarily through the use of discounts.  The allowances for sales returns are established based on our estimate of the amounts necessary to settle future and existing obligations for such items on products sold as of the balance sheet date.

 

 Accounts receivable

 

Accounts receivable are carried at the outstanding amount due less an allowance for doubtful accounts, if an allowance is deemed necessary. Allowance for doubtful accounts are established when there is a basis to doubt the full collectability of the accounts receivable. We periodically evaluate our accounts receivable and determine the requirement for an allowance, based on our history of past write-offs, collections and current conditions. When an account receivable is ultimately determined to be uncollectible and due diligence for collection has taken place, the account receivable is written-off.

 

Inventory

 

Inventory consists primarily of raw materials and finished goods that we hold for sale in the ordinary course of business.  Inventory is stated at the lower of cost (determined on the first-in, first-out basis) or market.  Other manufacturing overhead costs are also allocated to finished goods inventory.  We periodically evaluate the composition of inventory and estimates an allowance to reduce inventory for slow moving, obsolete or damaged inventory.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required for a smaller reporting company.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and our Controller, our principal accounting and financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Based on an evaluation carried out as of the end of the period covered by this quarterly report, under the supervision and with the participation of our management, including our CEO and Controller, our CEO and Controller have concluded that, as of the end of such period, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were ineffective as of June 30, 2012 due to the material weakness in our internal control over financial reporting identified in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

In our Annual Report, we indicated that we had a material weakness in our internal control over financial reporting resulting from an inadequate number of independent board members and lack of an independent audit committee, which may result in ineffective oversight in the establishment and monitoring of required internal controls and procedures. Management believes that the appointment of one or more independent directors will remedy the lack of a functioning audit committee and a lack of a majority of independent directors on the Company’s board. Management believes the appointment of independent directors will greatly decrease any control and procedure issues that the Company may encounter in the future. As our operations and business grow, the Company intends to add independent directors. The Company has not yet added any independent directors to its board of directors.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K  for the year ended December 31, 2011.

 

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Default Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not Applicable

 

Item 5. Other Information

 

None.

 

 

Item 6. Exhibits

 

(a)           Exhibits

 

Exhibit Number		Description of Document
21.1		List of Subsidiaries
31.1		Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Controller Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer and Controller pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document**
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document**
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document**
101.LAB		XBRL Taxonomy Extension Label Linkbase Document**
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document**

 

*

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

 

**

Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-Q within the permitted 30-day grace period for the first quarterly period in which detailed footnote tagging is required after the filing date of this Form 10-Q.

 

 

EMPOWERED PRODUCTS, INC.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Empowered Products, Inc.
Dated: August 14, 2012	/s/	Scott Fraser
	By:	Scott Fraser
	Its:	President and Chief Executive Officer
		(Principal Executive Officer and Authorized Officer)
	/s/	Kurt Weber
	By:	Kurt Weber
	Its:	Controller
		(Principal Financial and Accounting Officer)